Are You and Your Millennial Kids Investing Wrong?

Asset allocation — the way your investments are split among stocks, fixed income (i.e. bonds) and cash — is one of the keys to smart investing. But based on a new Wells Fargo study of the asset allocations of their boomer, Gen X and Millennial clients, I fear that all three generations may be making some serious investing mistakes.

Wells Fargo compared the stock, fixed income and cash allocations of 904,000 households who are Wells Fargo Advisors clients and have assets above $10,000 with the average allocations of U.S. target-date funds for people their age, categorized by Morningstar. (As a reminder: A target-date fund picks a specific year when its investors expect to retire and adjusts its holdings as those investors age, typically reducing the percentage of stocks and increasing the percentage of bonds over time.)

The Investing Reality for 3 Generations

The upshot: All three generations have much higher percentages of their investment portfolios in cash than the target-date funds for their age. Boomers and Gen Xers are light on bonds compared to the funds, but Millennials are just the opposite. And Gen Xers and Millennials aren’t investing in stocks as much as the target-date funds for their cohorts do.

“We thought this was really interesting,” said Tracie McMillion, head of global asset allocation strategy at Wells Fargo, who is based in Winston-Salem, N.C.

I’ll get to the likely explanations for the disparities shortly as well as some advice for all three generations. But first, here are the specifics:

Gen Xers have 14.1 percent in cash vs. the target-date fund’s 5.2 percent and 11.1 percent in fixed income vs. the target-date fund’s 15.2 percent. They have 67.9 percent in stocks vs. the fund’s 76.2 percent.

Millennials — the kids of the Boomers and Gen X’ers — have 14.2 percent in cash vs. the target-date fund’s 5.0 percent and 12.6 percent in fixed income vs. the fund’s 6.3 percent. They have a much lower percentage in stocks than the target-date fund for people their age (67.8 percent vs. 85.7 percent).

The Asset Allocation Rule of Thumb

To be clear, there is no precise percentage that people of a certain age must hold in stocks, bonds or cash. That said, financial advisers often use the rule of 100 minus your age: Subtract your age from 100 and that’s a good ballpark percentage for how much of your portfolio to hold in stocks. So if you’re 60, you would have 40 percent in stocks. If you’re 30, you would have 70 percent in stocks.

It’s worth noting, too, that the target date fund percentages Wells Fargo cited are higher than the “100 minus your age” rule of thumb for stocks at all ages. So the target percentages shouldn’t be taken too literally. And stocks do look a little worrisome right now. Quite a few financial analysts think we’re due for a market dip, or worse, because stocks have been on such a tear for so long — the S&P 500 is up roughly 270 percent since stocks bottomed in March 2009. Remember, though: Investing in stocks is a long-term proposition; you can’t let the prospect of periodic drops spook you.

Based on the Wells Fargo data, there’s no question that all three generations are holding much bigger chunks of their investments in cash than might be expected, however. McMillion surmises some may be doing this to have a “rainy day fund” as protection against a financial emergency.

Boomers and Gen X: Not Enough in Bonds?

But boomers and Gen Xers may be sabotaging their retirements by keeping such small percentages of their investment portfolios in bonds.

The Trouble With Hoarding Cash

“Cash is not a good investment over time and it’s not keeping up with inflation right now,” said McMillion. As BlackRock President Rob Kapito told Investopedia’s Mrinalini Krishna in June: “It would take a U.S. investor 35 years to double his or her money in cash, assuming a long-term expected return of 2 percent.”

Why Many Millennials Fear Stocks

The Millennials’ underweighting of their portfolios in stocks is in line with other surveys about how people in their 20s and 30s feel about investing in the market: very cautious.

In June, Legg Mason Global Asset Management found that 85 percent of Millennial investors described themselves as “conservative” investors and 52 percent said “very conservative.” BlackRock’s Global Investor Pulse Survey, in April, learned that Millennials were the generation most likely to agree with the statement: “What you might earn investing isn’t worth the risk of losing your money.”

There are two big reasons why so many Millennials seem so skittish about stocks and have been coaxed into cash. One is their memory of scary world and national events and the other is their sizable student loan debt that must be paid off (a median amount of $19,978 in a 2016 Wells Fargo study).

“Millennials came of age during the Sept. 11 attack and the housing crisis, and the Great Recession happened as they were starting their careers and getting out of college,” said McMillion. “All those things work together to make them a conservative generation at an earlier age [than previous generations].”

Looking Long-Term to Avoid Investing Wrong

By contrast, as Edelman Financial Services Chairman Ric Edelman recently told Barrons reporter Evie Liu in her story, “Why Won’t Millennials Embrace the Stock Market?,” boomers have seen the advantage of investing in stocks for the long-term.

“They saw the crash in 1987 and the bear market in 1992 but also the recovery afterwards,” Edelman said. “They know if they just give it time, it will all work out.”

A final piece of advice to boomers, Gen Xers and Millennials: By all means, have an emergency savings fund — equal to three to nine months of your living expenses. But put the rest of your extra money in diversified funds of stocks and bonds.

Richard Eisenberg is the Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and Managing Editor for the site. He is the author of How to Avoid a Mid-Life Financial Crisis and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch.@richeis315